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Russia is running out of money

Low oil profits, sanctions and structural problems have got Russia's economy stuck in a crisis; their emergency reserves are drying up. Still, the conflict with the West could escalate.

Russia is increasingly suffering under an economic crisis. Last year economic performance dropped by 3.7 percent, and the International Monetary Fund is expecting a further drop of about 1.8 percent this year.

There are a whole series of problems: first, oil prices dropped by more than half in the last year. The country and companies alike are faced with remarkably lower revenues.

"Low oil and natural gas prices make it extremely difficult to finance the budget," said Stefan Meister, Russia expert at the German Council on Foreign Relations (DGAP), a Berlin-based think tank. The government, he said, can only plug the budget deficit if they draw from asset reserves, which were built up years ago from the booming profits that came from the energy market.

Western economic sanctions in response to the annexation of the Crimean Peninsula and the conflict with Ukraine have added to the pressure. They have caused trade to collapse, which has also put a pinch on key sectors in Germany, like automobiles and heavy industry. More painful for Russia is the difficulty it faces in finding financing for investments due to the sanctions.

Financing problems

"Western sanctions have taken away the possibility for our banks and companies to borrow money from abroad, not only in Europe but also all over the world," said Wladimir Milow, director of the Moscow-based Institute of Energy Policy, in an interview with DW. "No one is loaning us money any more, not even China."

Milow is also founder and top executive of "Democratic Choice," a Russian opposition party.

Loans taken out in the past ten years are said to have laid the foundations for Russia's economic growth. Through the sanctions, said Milow, the volume of credit has been narrowed from $700 billion down to 470 billion.

The tremendous capital flight has also led the country's currency, the ruble, to lose half its value against the US Dollar.

Add to that the structural problems. The Russian economy is dominated by a few large companies in the energy sector, which essentially do the bidding of policymakers. "The premise of competition and rule of law is missing," Meister told DW.

LUKoil headquarters in Moscow: The shine is off the once illustrous Russian energy industry

Structural problems

These problems, according to energy expert Milow, were already noticeable back in 2013, before the sanctions and the decrease in oil prices. "Even back then, the Russian economy did not generate any growth. It is dependent on a few state monopolies that aren't efficient. And then add the sanctions and sinking oil price on top of that, and these three factors give us no hope of a return to economic growth in the foreseeable future."

Russian leaders want to counteract this through the sale of state companies and are planning the largest wave of privatizations seen in recent years. But even so, they do not want to sell off majority stakes.

"The regime is playing for time," said Meister. "There will be no lasting decisions made to improve the economic situation. They're only looking to sell off parts of the companies until oil and gas prices increase again."

Those bearing the burden of these developments are ordinary citizens. The World Bank estimates that the number of people living in poverty in Russia will increase to more than 20 million this year - in a country with a population of 140 million. That's the highest number in nine years.

The previously consumption-friendly middle class is spending less and less money. The inflation rate is officially 12.9 percent. For the middle class, the Russian business magazine RBK has estimated an increase in expenses of about 30 percent, in part due to a sharp rise in credit costs. Many small businesses have outstanding loans that are based on the euro or the dollar. Due to the devaluation of the ruble, they have become more expensive.

Revenues aren't flowing like they used to in the oil and gas industries

Repression

Unemployment has not yet increased, but dissatisfaction among the populace could become a problem for President Vladimir Putin - one which he is already preparing for.

"We're witnessing an expansion of the repression apparatus. A new national guard was just created," said Meister. "The regime is preparing itself for a conflict with the general public." In the future, Russia will experience local uprisings, the expert from the DGAP believes. "But I also see no opposition which can lead them. And I don't see a willingness in the population for mass demonstrations."

The big question is: when will Russia run out of money? Back in January, Russian Finance Minister Anton Siluanov said that the funds in state reserves could be used up by the end of the year. Then the government would need to tap into the national welfare fund in order to curtail the budget deficit. The welfare fund was likewise set up as an emergency reserve in 2008.

If oil prices do not increase, Russia could feasibly carry on "two or three years," according to Stefan Meister. But, at some point, "the train will hit a wall." Even so, a change of course in the Ukraine conflict in order to end western sanctions is not something to be expected, Meister said.

In fact, the opposite may be true: the conflict with the West could increase. "The regime would try that in order to distract from the economic crisis," said Meister. "It would rather create more conflicts internationally than to compromise, or push through reforms."